EUR Forecast: German CPI Due Friday – Euro trade could be flatter on Thursday

With Brexit concerns persisting and the European Central Bank (ECB) unlikely to expand stimulus measures in the near feature, the outlook for the Pound Euro exchange rate remains grim for the rest of 2016.

However, on Thursday the GBP EUR currency pair initially strengthened as the Pound was supported by better-than-forecast UK GDP data for the third quarter.

While growth did slow, the quarterly dip from 0.7% to 0.5% was far less severe than anticipated, giving GBP a small boost.

The Pound Euro exchange rate strengthened to 1.12 following the report’s release, but failed to hold gains and later fell back to 1.11.

According to The Telegraph; ‘Compared with the third quarter of last year, growth picked up to 2.3 percent, the strongest pace in more than a year, according to the preliminary figures from the Office for National Statistics. Supporters of Brexit are likely to say the figures back the claims they made during the referendum campaign that warnings of a big hit to Britain’s economy from a vote to leave the EU were little more than scaremongering. The stronger-than-expected growth in the third quarter was thanks only to the country’s dominant services sector which saw rapid growth in film and television production and distribution.’

Meanwhile, the Chairman of the Federation of Small Businesses (FSB) remarked; ‘The growth we have seen is, in no small part, due to small businesses’ hard work and resilience. This comes against a backdrop of unavoidable economic uncertainty following the referendum result, coupled with growing domestic challenges. In fact, 62 per cent of businesses in our most recent survey cited the domestic economy as a barrier to growth.’

(Previously Updated 07:00)

Wednesday saw the Pound Sterling Euro exchange rate trending largely flatly, struggling to recover from Tuesday’s plunge as a dip in US Dollar demand left the Euro stronger and the Pound limp.

GBP EUR has lost over half a cent in value since markets opened this week, largely due to a Tuesday Sterling plunge which saw the pair hit a low of 1.1140. While GBP EUR has recovered from these lows, the pair has been unable to hold above the key level of 1.12 since Tuesday.

Pound (GBP) Exchange Rates Flounder as BoE Easing Concerns Weigh

Economic concerns continued for Britain on Wednesday, but the Pound was largely able to hold its ground throughout the day and attempted to hold above its Tuesday lows.

Tuesday’s comments from UK Chancellor Philip Hammond, which caused a brief, sharp Pound selloff, continued to weigh on demand for the Pound throughout the day.

Hammond had reasserted that the government would not refuse or interfere with the Bank of England’s (BoE) monetary policy, namely quantitative easing extensions. This led to many investors speculating that a QE extension was on the way, and Sterling slumped for the remainder of the day.

On Wednesday, a report from the Resolution Foundation think-tank warned that the British Treasury could see an expanding ‘black hole’ deficit of up to $84b in the coming years, partially due to the effects of the Brexit vote.

Additionally, a report from UBS Wealth Management claimed that Sterling value still had further to fall, and while the currency could recover a year from now there are still many downside risks. Geoffrey Yu from UBS stated;

‘Though the Pound should recover accordingly, we cannot underestimate the central role that politics has played in Sterling’s fate up until now. With the terms and conditions of the UK’s future trade links still unclear it is too early to rule out further downside risks in Sterling.’

Euro (EUR) Buoyed by US Dollar Dip, Week’s Optimistic Eurozone News

While the Euro struggled to capitalise on Monday or Tuesday’s optimistic Eurozone data results due to ongoing European Central Bank (ECB) concerns and a bullish US Dollar, the shared currency finally appeared to be afforded some breathing room on Wednesday as it edged higher across the board.

The Euro’s rival, the US Dollar, slipped on Wednesday with markets taking another brief indulgent risk-on rally. This gave the Euro a little more attention despite Wednesday’s German consumer confidence failing to meet expectations.

GfK’s German consumer confidence scores for November slipped from 10 to 9.7 despite being expected to hold at 10. This result, as well as ECB easing bets, may have weighed on the Euro’s potential to advance.

On the other hand, Monday and Tuesday’s strong Eurozone PMIs and German business confidence scores, as well as Wednesday’s news that German import prices had improved more than expected, helped the shared currency to hold GBP recoveries at bay.

The Pound Euro exchange rate has become used to flat and uninspired trade in recent weeks, with the British currency seemingly decoupled from domestic data.

However, Thursday’s session will see the publication of the most influential UK dataset from recent weeks – which could easily cause some Pound volatility despite this speculation.

While the day’s Eurozone economic calendar is quiet, Britain’s preliminary Q3 Gross Domestic Product (GDP) results are certain to turn some heads when they are published in the morning.

Quarter-on-quarter growth is expected to have slowed from 0.7% to 0.3%, while yearly growth is predicted to hold at 2.1%. If these scores fail to meet expectations, concerns about Britain’s economic activity since the Brexit vote will worsen and Sterling will fall.

Conversely, even if UK growth beats expectations this doesn’t mean the Pound will advance. UK investors are already aware of analysis that the Brexit vote itself did not have a considerable effect on the economy, so solid performance means little for a post-Brexit Britain.

The Euro, on the other hand, could weaken again if demand for the US Dollar returns, or if Friday’s German Consumer Price Index (CPI) for October disappoints expectations. These would be the Pound Sterling Euro exchange rate’s best chances of recovering the week’s losses.